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1
Lec
ture
4: Eco
nom
ics an
d
Ener
gy
2
Neo
clas
sica
l Eco
nom
ics Prim
er
Quan
tity
Price
Supply
Curv
e
Dem
and
Curv
e
Ref
eren
ce: A
ny U
nder
gra
duat
e Eco
nom
ics te
xt co
ver
s th
is stu
ff b
ut I hav
e use
d
Beg
g, Fis
cher
& D
orn
busc
hEconomics fro
m M
cGra
w H
ill
Neoclassical
Economics
•Mar
ket
with m
ultip
le
buyers
and sel
lers
•Buyer
s an
d sel
lers
indep
enden
t an
d
rational
•All rel
evant
info
rmat
ion a
vai
lable
to a
ll p
layer
s
•Mar
ket
will re
ach a
n
equilib
rium
at th
e
poin
t w
her
e th
e
mar
gin
al c
ost o
f
pro
duct
ion =
mar
gin
al
dem
and (su
pply
and
dem
and c
urv
es
inte
rsec
t).
3
What
type
of G
over
nm
ent do y
ou
hav
e?
•Market Economy
Fre
e m
arket
s ar
e use
d to
det
erm
ine
the
pro
duct
ion a
nd d
istrib
ution o
f goods
and ser
vic
es.
•Planned Economy G
over
nm
ent co
ntrols w
hat
is
pro
duce
d a
nd w
hat
quan
tities
are
pro
duce
d
•A
lmost
all rea
l gover
nm
ents
are
Mixed
Economiesco
mbin
ing som
e el
emen
ts o
f both
.
4
Som
e B
asic
Conce
pts
•The
under
pin
nin
g p
rinci
ple
of th
e market economy
is that
if th
e price
of a
good fully ref
lect
s both
the
cost
of
pro
duct
ion to the
seller
and the
val
ue
of th
e good to the
buyer
then
the
mar
ket
will w
ork
to e
nsu
re that
the
optim
um
quan
tity
of th
at g
ood is pro
duce
d a
t th
e optim
um
price
. (n
eo-c
lass
ical
eco
nom
ics)
. U
nder
thes
e ci
rcum
stan
ces a
mar
ket
is sa
id to b
e ef
fici
ent.
•Private Good: A
privat
e good is one
that
if co
nsu
med
by a
per
son c
annot be
consu
med
by a
noth
er. Exam
ple
s: P
etro
l,
Food, housi
ng
•A
Public Good
is o
ne
that
even
if it is co
nsu
med
by o
ne
per
son is st
ill av
aila
ble
for co
nsu
mption b
y o
ther
s.
Exam
ple
s: D
efen
ce, R
oad
s, N
atio
nal
Par
ks, T
elev
isio
n P
rogra
ms.
•Exper
ience
sugges
ts that
gover
nm
ent is
les
s likel
y to p
roduce
privat
e goods ef
fici
ently than
the
privat
e se
ctor
(dep
ends on y
our politica
l poin
t of vie
w).
•Free Rider Problem
: If o
ne
per
son p
ays fo
r a
public
good then
oth
ers m
ay a
vai
l of it for fr
ee (fr
ee rid
er). In a
privat
e m
arket
ever
yone
may c
hoose
to w
ait fo
r so
meo
ne
else
to p
ay for th
e good a
nd n
oth
ing m
ay b
e pro
duce
d.
Alter
nat
ivel
y e
ver
yone
may indep
enden
tly p
ay for it res
ultin
g in
mas
sive
over
pro
duct
ion. P
rivat
e m
arket
s often
hav
e difficu
lty e
nsu
ring that
the
right am
ount of a
public
good is pro
duce
d. G
over
nm
ents
will often
inte
rven
e to
control th
e su
pply
of p
ublic
goods. A
n e
xam
ple
fro
m the
Ener
gy fie
ld m
ight be
the
pro
vis
ion o
f a
Nat
ional
Grid for th
e Ele
ctrici
ty S
upply
Net
work
.
•Energy is essentially a private good
but in
som
e ca
ses ev
en p
rivat
e goods m
arket
s m
ay n
ot fu
nct
ion e
ffic
iently a
nd
Market Failure
is sai
d to o
ccur. In
thes
e ca
ses gover
nm
ents
may inte
rven
e in
the
mar
ket
for privat
e goods.
5
Cau
ses of M
arket
Fai
lure
•Externalities
exis
t w
hen
the
pro
duct
ion o
r co
nsu
mption o
f a
good d
irec
tly a
ffec
ts c
onsu
mer
s not
involv
ed in b
uyin
g o
r se
llin
g it an
d w
hen
those
spill over
eff
ects
are
not re
flec
ted in m
arket
price
s.
Exam
ple
s: I d
rive
a ca
r m
y n
eighbour su
ffer
s from
air p
ollution.I pai
nt m
y h
ouse
my n
eighbour
ben
efits from
hav
ing a
pre
ttie
r vie
w.
•Information Related Problems. N
eocl
assi
cal ec
onom
ics as
sum
es that
pro
duce
r an
d c
onsu
mer
s ac
t in
thei
r ow
n b
est in
tere
sts. H
ow
ever
in a
com
ple
x m
oder
n soci
ety
firm
s an
d c
onsu
mer
s m
ay n
ot hav
e ac
cess
to a
ll the
info
rmat
ion they
nee
d to m
ake
an info
rmed
dec
isio
n.
•The
neo
-cla
ssic
al m
odel
ass
um
es c
om
pet
itio
n w
ith m
any b
uyer
s an
d m
any sel
ler. If a
single
buyer
or
seller
has
the
ability to e
ffec
t m
arket
price
s si
gnific
antly they
are
sai
d to h
ave Market power
or
Monopoly Power. If a
mar
ket
is dom
inat
ed b
y a
supplier
with m
onopoly
pow
er they
will ty
pic
ally
pro
duce
too little
of a
good a
t to
o h
igh a
price
. Tra
ditio
nal
ly lar
ge
ener
gy u
tilities
hav
e en
joyed
a
monopolistic
posi
tion.
•Barriers to Entry or Exit If new
firm
s ar
e pre
ven
ted fro
m e
nte
ring a
mar
ket
(per
hap
s due
to
rest
rict
ive
lice
nsing, lar
ge
inves
tmen
t co
sts or ec
onom
ies of sc
ale)
then
incu
mben
ts w
ill en
joy som
e m
onopolistic
advan
tages
and the
mar
ket
will be
inef
fici
ent. L
ikew
ise
if ther
e ar
e bar
rier
s to
exit (fo
r ex
ample
hig
h red
undan
cy c
ost
s) then
a firm
may
continue
to supply
at an
unpro
fita
ble
rat
e ag
ain
lead
ing to a
n inef
fici
ent m
arket
. R
enow
ned
Man
agem
ent guru
Mic
hae
l Porter
iden
tified
Ener
gy a
s a
mar
ket
with h
igh b
arrier
s to
Entry –
Why?
6
It M
ay B
e Effic
ient B
ut is it Fai
r?
•A
mar
ket
is th
at is w
ork
ing e
ffic
iently d
oes
not nec
essa
rily
mea
n that
it is
fai
r in
an
ethic
al sen
se. D
epen
din
g o
n w
ho sta
rts out w
ith the
most
res
ourc
es the
outc
om
es c
an
var
y w
idel
y.
•W
hen
a g
over
nm
ent in
terv
enes
to a
ddre
ss m
arket
fai
lure
the
inte
ntion is to
cre
ate
a si
tuat
ion w
her
e ev
erybody b
enef
its fr
om
the
optim
um
lev
el o
f pro
duct
ion o
f a
good o
r se
rvic
e at
the
optim
um
price
. H
ow
ever
gover
nm
ents
may
als
o inte
rven
e in
a m
anner
w
hic
h d
irec
tly b
enef
its one
sect
ion o
f so
ciet
y a
t th
e ex
pen
se o
fan
oth
er.
•Income Redistribution
is o
ne
mea
ns by w
hic
h a
gover
nm
ent ca
n try
to a
ddre
ss ineq
uity
in a
mar
ket
eco
nom
y. A
n e
xam
ple
is th
e ta
xat
ion o
f th
ose
with jobs to
pay
unem
plo
ym
ent as
sist
ance
to those
without. (C
orr
upt gover
nm
ents
may
even
attem
pt to
re
-dis
trib
ute
inco
me
the
oth
er w
ay fro
m p
oor to
ric
h.)
•Merit Goods typically include
hea
lth e
duca
tion, sh
elte
r an
d food. A
soci
ety m
ay
bel
ieve
that
ever
yone
has
a rig
ht to
cer
tain
bas
ic p
rovis
ions an
d tak
e st
eps to
pro
vid
e th
is reg
ardle
ss o
f an
indiv
idual
s ec
onom
ic sta
tus. A
n indiv
idual
’s e
ner
gy req
uirem
ent
for hea
ting / lig
hting a
nd c
ookin
g is often
see
n a
s a
mer
it g
ood
and g
over
nm
ents
may
ta
ke
step
s th
eref
ore
to spec
ific
ally
com
bat
Fuel Poverty.
7
A M
arket
Vie
w o
f Ener
gy P
olicy
•A
pure
fre
e m
arket
per
spec
tive
sugges
ts that
a g
over
nm
ent
does
not nee
d to inte
rfer
e in
ener
gy m
arket
s yet
alm
ost
ev
ery g
over
nm
ent does
.
•It is poss
ible
to a
nal
yse
gover
nm
ent en
ergy p
olicy
in ter
ms
of m
arket
fai
lure
s an
d g
over
nm
ent at
tem
pts
to rec
tify
th
em.
•A
n e
xce
llen
t so
urc
e fo
r th
is w
as the
Gover
nm
ent of
Irel
and’s
1999 G
reen
pap
er o
n S
ust
ainab
le E
ner
gy w
hic
h
under
took a
com
pre
hen
sive
anal
ysis of Ir
elan
d’s
Ener
gy
supply
situat
ion fro
m the
poin
t of vie
w o
f m
arket
fai
lure
. Sad
ly this
docu
men
t no longer
see
ms to
be
avai
lable
online.
8
Exam
ple
s of Ener
gy M
arket
Fai
lure
•Exte
rnal
ity
–Pollution d
ue
to foss
il fuel
com
bustio
n is a
clea
r ex
tern
ality.
Peo
ple
who o
bta
in n
o d
irec
t ben
efit fro
m the
use
of fu
el m
ust
endure
the
har
mfu
l ef
fect
s of en
ergy p
ollution. Fro
m a
mar
ket
per
spec
tive
the
price
of fu
el is to
o low
bec
ause
it only
ref
lect
s th
e pro
duce
rs c
osts it d
oes
not re
flec
t th
e co
st to those
who m
ust
endure
the
pollution. Policy
attem
pts to c
orrec
t th
is incl
ude
pro
posa
ls for Car
bon tax
and E
missions Tra
din
g S
chem
es. O
ne
difficu
lty th
at a
rise
s is e
nsu
ring that
the
additio
nal
inco
me
is
chan
nel
led b
ack to those
affec
ted. In
the
case
of pollution e
ver
yone
is a
ffec
ted so it co
uld
be
said
that
a c
arbon tax
(in
theo
ry tax
reven
ue
ben
efits ev
erybody) is a
logic
al res
ponse
.
9
Ener
gy M
arket
Fai
lure
Cont.
•In
form
atio
n G
ap–
Lac
k o
f ad
equat
e in
form
atio
n is often
see
n a
s a
bar
rier
to im
pro
vem
ents
in
Eff
icie
ncy
. O
ften
a m
ore
eff
icie
nt pro
duct
or se
rvic
e w
ill co
st m
ore
up fro
nt but
less
in the
long run w
hen
ener
gy sav
ings ar
e ta
ken
into
acc
ount.
Unle
ss the
cust
om
er h
as e
nough info
rmat
ion to m
ake
an info
rmed
dec
isio
n the
appar
ently
more
expen
sive
solu
tion is likel
y to b
e over
looked
. This
pro
ble
mis
bei
ng tac
kle
d a
num
ber
way
s. A
t EU
lev
el A
pplian
ce lab
elling d
irec
tives
aff
ect al
most
all w
hite
goods (f
ridges
, co
oker
s, w
ashin
g m
achin
es) w
hic
h m
ust
now
car
ry a
nd e
ner
gy
effici
ency
lab
el. The
Ener
gy P
erfo
rman
ce in b
uildin
gs D
irec
tive
(EPB
D) w
ill
require
all buildin
gs to
be
pro
vid
ed w
ith a
n e
ner
gy rat
ing c
ertifica
te w
hen
they
are
built or at
the
poin
t of sa
le o
r re
nta
l fo
r ex
isting b
uildin
gs. G
over
nm
ent ca
mpai
gn
to p
rom
ote
the
use
of en
ergy e
ffic
ient te
chnolo
gie
s (lag
gin
g jac
ket
s, C
FL lig
ht
bulb
s) a
lso a
ttem
pt to
adder
s th
is p
roble
m. Ther
e is
als
o a
rec
ognitio
n that
the
com
ple
x n
ature
of en
ergy tec
hnolo
gy m
ay req
uire
spec
ialist
know
ledge
to m
ake
info
rmed
dec
isio
ns. T
his
has
pro
mpte
d g
over
nm
ents
to a
ctiv
ely support the
dev
elopm
ent of “e
ner
gy ser
vic
es indust
ries
”. E
ner
gy ser
vic
es c
om
pan
ies se
ll thei
r ex
per
tise
in e
ner
gy to o
ther
com
pan
ies to
ass
ist th
em
in o
ptim
isin
g thei
r en
ergy
use
.
10
Ener
gy M
arket
Fai
lure
•M
onopoly
Pow
er–
In m
any c
ountrie
s el
ectric
ity a
nd g
as w
ere
histo
rica
lly p
rovid
edby
larg
e stat
e ow
ned
monopolies
. Fro
m a
mar
ket
per
spec
tive
a su
pplier
monopoly
will le
ad to inad
equat
e pro
duct
ion a
nd h
igh
price
. M
any W
este
rn n
atio
ns hav
e dism
antled
thes
e stat
e m
onopolies
and u
nder
taken
a p
rogra
mm
e of en
ergy m
arket
liber
alisat
ion.
Of co
urs
e w
hile
ener
gy itsel
f is a
privat
e good that
may
most
effici
ently b
e su
pplied
by p
rivat
e en
terp
rise
the
infras
truct
ure
(wires
or pip
elin
es) th
at a
re u
sed to d
istrib
ute
it ar
e m
ore
of a
public
good. O
ne
stra
tegy is to
privat
ise
the
sale
of en
ergy itsel
f but to
kee
p the
infras
truct
ure
in p
ublic
ow
ner
ship
. In
Ire
land the
supply
of el
ectric
ity (since
2005) an
d the
supply
of gas
(since
July
2007) hav
e bee
n fully lib
eral
ised
but th
e net
work
s re
mai
n u
nder
ce
ntral
ised
control.
11
Addre
ssin
g F
airn
ess
•In
com
e Red
istrib
ution
–The
tax a
nd soci
al w
elfa
re system
s ar
e use
d in m
any c
ountrie
s to
re-d
istrib
ute
inco
me
in a
more
equitab
le m
anner
while
this
undoubte
dly
mak
es it ea
sier
for so
cial
wel
fare
rec
ipie
nts to
purc
has
e fu
el this is not sp
ecific
ally
an e
ner
gy iss
ue.
•Fuel
as a
Mer
it G
ood
–The
bas
ic fuel
req
uired
for hea
ting, lighting a
nd c
ookin
g is se
en a
s a
mer
it g
ood in m
any c
ountrie
s. In Ire
land this is ad
dre
ss thro
ugh
fuel
subsidie
s fo
r th
ose
on soci
al w
elfa
re. Subsidisin
g e
ner
gy
effici
ent m
easu
res in
low
inco
me
housing is al
so a
pilla
r of he
gover
nm
ents a
ppro
ach to tac
kin
g fuel poverty
since
those
on low
in
com
es a
re o
ften
not in
a p
osition to m
ake
the
inves
tmen
t re
quired
to
instal
l en
ergy sav
ing tec
hnolo
gie
s.
12
Lookin
g c
lose
r at
Supply
and
Dem
and: Ela
stic
ity
•A
supply
curv
e or dem
and c
urv
e w
hic
h d
oes
not
var
y strongly
with p
rice
is sa
id to b
e in
-ela
stic
•A
Supply
or dem
and c
urv
e w
hic
h v
arie
s stro
ngly
with p
rice
is sa
id to b
e el
astic.
•K
now
ledge
of th
e price
ela
stic
ity o
f fu
els ca
n h
elp
a gover
nm
ent pre
dic
t th
e im
pac
t of price
chan
ges
for ex
ample
due
to im
posi
ng a
car
bon tax
.
13
Ela
stic
ity D
iagra
ms
Price
Quan
tity
Dem
and
Supply
Price
Quan
tity
Dem
andSupply
Quan
tity
Supply
Dem
and
Price
Ela
stic
Supply
and D
eman
d
Ela
stic
Supply
Inel
astic
Dem
and
Inel
astic
Supply
Ela
stic
Dem
and
14
Supply
Ela
stic
ity
•M
ost
nat
ions ar
e not big
enough for th
eir en
ergy d
eman
d
alone
to m
ake
an im
pac
t on g
lobal
fuel
supply
and g
lobal
fu
el p
rice
.
•Ther
efore
for a
nat
ion lik
e Irel
and the
supply
curv
e fo
r im
ported
fuel
must
be
consi
der
ed to b
e per
fect
ly e
lastic
–The
price
does
not var
y reg
ardle
ss o
f quan
tity
.
•In
eco
nom
ic ter
ms Ir
elan
d is sa
id to b
e a
“price
tak
er”
•Even
when
ther
e ar
e in
dig
enous re
sourc
es a
nat
ion is likel
y
to b
e a
price
tak
er a
s lo
ng a
s th
ere
is the
free
dom
to tra
de
that
res
ourc
e in
tern
atio
nal
ly. The
rece
nt dis
cover
y o
f oil
off H
ook H
ead for ex
ample
is unlikel
y to res
ult in low
er
Iris
h o
il p
rice
s. T
he
oil c
om
pan
y w
ill se
ll the
oil for th
e in
tern
atio
nal
goin
g rat
e.
15
Dem
and E
last
icity
•O
wn P
rice
Ela
stic
ity o
f D
eman
d
–This
is def
ined
as:
Per
centa
ge
Incr
ease
in D
em
and / P
erce
nta
ge
Incr
ease
in P
rice
–Exam
ple
: The
ow
n p
rice
dem
and e
lastic
ity o
f pet
rol has
bee
n d
eter
min
ed to b
e -0
.4. Pet
rol is
cu
rren
tly p
rice
d a
t €1.1
0/litre
. W
hat
incr
ease
(or dec
reas
e) in p
etro
l co
nsu
mption w
ould
you
expec
t in
res
ponse
to a
10c
incr
ease
in the
price
of a
litre
of pet
rol?
•Sin
ce som
e fu
els m
ay b
e su
bst
itute
d for oth
ers it is al
so p
oss
ible
to c
onsi
der
the
cross
price
ela
stic
ity o
f dem
and =
Per
centa
ge
incr
ease
in D
eman
d o
f Fuel
X / P
erce
nta
ge
Incr
ease
in
Price
of Fuel
Y
Cro
ss p
rice
ela
stic
ity is par
ticu
larly u
sefu
l fo
r pre
dic
ting fuel
sw
itch
ing b
ehav
iour.
Exam
ple
: The
gover
nm
ent im
pose
s a
10c
per
litre
additio
nal
tax
on p
etro
l (p
revio
us
price
€1.1
0/litre
) in
an a
ttem
pt to
move
the
public
to b
iofu
els. It w
as n
otice
d that
the
consu
mption o
f bio
fuel
s w
ent up b
y 5
% in res
ponse
to this
move.
Cal
cula
te the
cross
price
ela
stic
ity o
f B
io fuel
to P
etro
l.
16
Price
Ela
stic
ity's
•K
now
ing the
price
ela
stic
ity o
f en
ergy d
eman
d is an
im
portan
t to
ol fo
r policy
mak
ers in
ass
essing the
impac
ts o
f ch
anges
in e
ner
gy p
olicy
. U
nfo
rtunat
ely ther
e ar
e w
idel
y v
aryin
g e
stim
ates
for en
ergy e
lastic
ity's
avai
lable
fro
m d
iffe
rent so
urc
es. In
gen
eral
res
earc
her
s distinguish
bet
wee
n short ter
m e
lastic
ity long run e
lastic
ity. It tak
es tim
eto
sw
itch
from
one
fuel
type
to a
noth
er a
nd long run e
lastic
ity is th
eref
ore
gre
ater
than
short run.
•Estim
ates
of th
e price
ela
stic
ity o
f en
ergy d
eman
d v
ary fro
m -0.1
up to
-1.0
. The
Irish g
over
nm
ent has
use
d a
fig
ure
of -0
.4 in its d
elib
erat
ions
about a
poss
ible
car
bon tax
(D
epar
tmen
t of Fin
ance
Tax
Strat
egy
TSG
0223A
Oct
2002).
•Ele
ctrici
ty is usu
ally
consider
ed to b
e th
e m
ost inel
astic
“fuel
”due
to
the
lack
of al
tern
ativ
es a
vai
lable
.
17
Mar
ket
Vie
w o
f Policy
Inst
rum
ents
applied
to E
ner
gy: R
egula
tion
•Regulation is direc
t gover
nm
ent in
terv
ention in the
mar
ket
pla
ce. O
ne
pote
ntial
ly c
ontrover
sial
exam
ple
is price
controls. W
hile
cappin
g the
price
of el
ectric
ity w
ill be
a popula
r m
ove
with v
ote
rs -m
arket
theo
ry
pre
dic
ts that
in a
com
pet
itiv
e m
arket
this c
ould
res
ult in a
fal
l in
supply
an
d shortag
es. If th
ere
is a
supplier
monopoly
how
ever
then
price
ca
ppin
g c
an b
e an
effec
tive
mec
han
ism
to e
nsu
re a
deq
uat
e su
pply
.In
Irel
and the
ener
gy reg
ula
tors
(CER) has
a sta
tuto
ry role
to e
nsu
re that
en
ergy p
rice
s ch
arged
a fai
r an
d rea
sonab
le. In
pra
ctise
the
CER
regula
tes th
e re
ven
ues
and tar
iffs
of th
e dom
inan
t stat
e ow
ned
su
pplier
s fo
r gas
and e
lect
rici
ty (ESB a
nd B
GE).
•Information: The
gover
nm
ent pro
visio
n o
f stat
e bodie
s an
d
info
rmat
ion ser
vic
es c
an b
e se
en a
s an
attem
pt to
addre
ss m
arket
failure
due
to info
rmat
ion d
ifficu
ltie
s.
18
Eco
nom
ic Inst
rum
ents
applied
to
Ener
gy:
•Taxation
In m
any jurisd
ictions fu
el tax
es a
re lev
ied a
nd m
oto
r fu
el in p
articu
lar ex
per
ience
s hig
h
level
s of ta
xat
ion. Fro
m a
mar
ket
poin
t of vie
w this
could
be
seen
as a
just
ific
atio
n for th
e ex
tern
alitie
s at
tach
ed to fuel
consu
mption –
for ex
ample
the
cost
of ro
ads an
d the
cost
to the
environm
ent. H
ow
ever
the
inel
astici
ty o
f fu
el d
eman
d a
lso m
eans th
at fuel
tax
atio
n is a
han
dy sourc
e of re
ven
ue
footh
er u
nre
late
d n
eeds. M
arket
theo
ry p
redic
ts that
any incr
ease
in p
rice
will re
sult in a
dec
line
in c
onsu
mption a
nd c
are
nee
sto
be
taken
to a
void
dam
agin
g e
ffec
ts o
n c
om
pet
itiv
enes
s
•Differential taxation
of fu
els has
bee
n p
ropose
d a
s a
mea
ns of en
coura
gin
g fuel
sw
itch
ing in o
rder
to
ach
ieve
environm
enta
l goal
s. F
or ex
ample
in the
UK
a C
lim
ate
Chan
ge
levy (C
CL) has
bee
n
applied
to c
om
mer
cial
fuel
s since
2001 a
t a
rate
of 0.4
3p/k
Wh o
nel
ectric
ity, 0.1
5p/k
Wh o
n c
oal
and
0.1
5p/k
Wh o
n g
as. To e
mphas
ise
that
this
is not a
reven
ue
collec
ting m
easu
re the
pro
ceed
s ar
e re
cycl
ed to indust
ry v
ia red
uct
ions in
em
plo
yer
s so
cial
insu
rance
contrib
utions. P
erhap
s th
e gre
ates
t im
pac
t has
bee
n to e
nco
ura
ge
larg
e en
ergy u
sing sec
tors
to
volu
nta
rily
ente
r in
to climate change
agreements in w
hic
h they
co
mm
it to im
pro
vem
ents
in e
ner
gy e
ffic
iency
. M
ore
Info
: http://w
ww
.def
ra.g
ov.u
k
•A
tru
e Carbon Tax has
bee
n c
onsi
der
ed in som
e co
untrie
s in
cludin
g Ire
land. In
this
cas
e th
e ex
tern
ality o
f C
O2 e
mis
sions w
ould
be
reflec
ted in the
price
of fu
el v
ia a
tax
in p
roportio
n to the
emis
sions from
that
fuel
. E
conom
ic theo
ry sugges
ts that
the
optim
um
lev
el o
f ca
rbon tax
should
co
rres
pond to the
mar
ket
val
ue
of ca
rbon a
s det
erm
ined
by a
n emissions trading market
. A
lso to
avoid
im
posi
ng a
double
char
ge
larg
e en
ergy u
sers
who a
re p
arties
to the
emis
sions trad
ing sch
eme
should
be
exem
pt from
car
bon tax
and fuel
s w
hic
h h
ave
alre
ady incu
rred
a c
har
ge
under
the
emis
sions trad
ing sch
eme
(for ex
ample
Ele
ctrici
ty) sh
ould
als
o b
e ex
empt. A
tax
whic
h a
ttem
pts
to
com
pen
sate
for neg
ativ
e ex
tern
alitie
s in
know
n a
s a
Pig
ovia
nTax
(Irel
ands pla
stic
bag
lev
y).
19
Eco
nom
ic Inst
rum
ents
Cont.
•SubsidiesFro
m a
fre
e m
arket
per
spec
tive
a gover
nm
ent
has
no n
eed to subsi
dis
e a
pro
fita
ble
ven
ture
and h
as n
o
busi
nes
s su
bsi
disin
g a
n u
npro
fita
ble
one.
Indee
d E
U
com
pet
itio
n leg
isla
tion m
akes
it ver
y d
ifficu
lt for a
mem
ber
to sta
te to subsidis
e its ow
n industries
to the
det
rim
ent of fo
reig
n c
om
pet
itio
n. H
ow
ever
ther
e ar
e ex
ample
s w
her
e m
arket
fai
lure
may
be
attrib
ute
d to
barriers to entry
and a
subsi
dy e
spec
ially o
f up fro
nt
cost
s m
ay red
uce
bar
rier
to e
ntry. In
ener
gy ter
ms
gover
nm
ent m
ay c
hoose
to subsi
dis
e th
e ca
pital
cost
of
more
environm
enta
lly e
ffic
ient fo
rms of en
ergy u
se in
ord
er to o
ver
com
e th
e bar
rier
to e
ntry o
f per
ceiv
ed h
igh u
p
front co
st.
20
Eco
nom
ic Inst
rum
ents
: Em
issi
ons
Tra
din
g•
A m
ajor pilla
r of Euro
pe’s
clim
ate
change
resp
onse
has bee
n
the
imple
menta
tion o
f an
EU
wid
e Em
ission T
radin
g S
chem
e (E
U D
irect
ive
2003/8
7/E
C )
–First
Phas
e 2005-2
007
–Sec
ond P
has
e 2008-2
012
•U
nder
the
direct
ive
larg
e pro
ducer
s of gre
enhouse
gas
es m
ust
acquire
the
appro
priat
e num
ber of EU
car
bon a
llow
ance
s (E
UA
s). U
sefu
l R
efe
rence
: http://c
arbonpositive.
net
•EU
Asm
ay b
e bought and sold
and a
fre
e m
arket
estab
lish
es the
curr
ent price
.
•The
tota
l num
ber
of EU
Asand the
allo
cation to c
ountrie
s is
det
erm
ined
at EU
lev
el. W
ithin
a c
ountry a
llocat
ions ar
e det
erm
ined
by a
Nat
ional
Alloca
tion P
lan.
•The
ETS p
rovid
es a
sim
ple
eff
ective
mec
han
ism
for re
duci
ng
over
all em
issions by sim
ply
reduci
ng the
tota
l am
ount of EU
As
avai
lable
. G
over
nm
ents n
eed n
ot co
ncer
n them
selv
es w
ith
where
sav
ings w
ill be
mad
e but m
ark
et forc
es ensu
re that
those
w
ho c
an m
ake
savin
gs co
st e
ffec
tivel
y w
ill do so.
•In
the
firs
t phas
e al
low
ances
were
gra
ndfa
ther
ed w
ith
par
tici
pan
ts rece
ivin
g fre
e al
low
ances
bas
ed o
n h
isto
ric
em
issions. T
his h
as b
een c
riticised
as a
free
win
dfa
ll g
ift to
the
incum
bents a
nd a
rew
ard
for histo
ric
ineffic
iency.
•Ele
ctrici
ty G
ener
ators
are
a p
arty to the
EU
ETS so e
lect
rici
ty
gener
ated
fro
m foss
il fuel
s in
curs
an E
UTS c
ost.
•For Ref
erence
€20 /tc
o2e
adds 0.4
1c
to a
kw
hof nat
ura
l gas an
d
1.2
7c
to a
kw
hof el
ect
rici
ty.
Car
bon M
arket
Price
in E
uro
s per
tC
O2e
on 1
Mar
ch 2
011.
Sourc
e: h
ttp://w
ww
.poin
tcar
bon.c
om
21
Wes
tern
Clim
ate
Chan
ge
Initia
tive
“The
WC
I is
a c
ollab
ora
tion o
f
indep
enden
t ju
risd
ictions w
ho c
om
mit
to w
ork
toget
her
to iden
tify
, ev
aluat
e,
and im
ple
men
t polici
es to tac
kle
clim
ate
chan
ge
at a
reg
ional
lev
el. ”
“The
central
com
ponen
t of th
e
com
pre
hen
sive
WC
I st
rate
gy is a
flex
ible
, m
arket
-bas
ed, re
gio
nal
cap
-
and-tra
de
pro
gra
m that
cap
s
gre
enhouse
gas
em
issi
ons an
d u
ses
trad
able
per
mits to
ince
ntdev
elopm
ent
of re
new
able
and low
er-p
olluting
ener
gy sourc
es”
Pro
gra
mm
e re
leas
ed in July
2010. M
ore
info
rmat
ion a
vai
lable
from
http://w
ww
.wester
ncl
imat
einitia
tive.
org
/acc
esse
d 2
0
Oct
ober
2010
22
Eco
nom
ic Inst
rum
ents
: R
enew
able
Ener
gy O
bligat
ion C
ertifica
tes (R
OC
s)
•Sin
ce 2
003 E
lect
rici
ty supplier
s in
the
UK
hav
e bee
n req
uired
to
acquire
a ce
rtai
n p
erce
nta
ge
of th
e en
ergy they
supply
fro
m ren
ewab
le
sourc
es (rising to11.1
% in
2011).
•Ren
ewab
le O
bligat
ion C
ertifica
tes (R
OCs)
are
iss
ued
to p
roduce
rs
who show
that
they
hav
e pro
duce
d e
ner
gy fro
m ren
ewab
le sourc
es.
Pro
duce
rs w
ho p
roduce
a surp
lus of RO
Csar
e free
to tra
de
thes
e.
•Thus a
foss
il fuel
gen
erat
or m
ay sat
isfy
thei
r obligat
ion b
y p
urc
has
ing
RO
Csfrom
a ren
ewab
le e
ner
gy supplier
.
•In
mar
ket
ter
ms RO
Csar
e co
nver
ting a
n e
xte
rnal
ity into
a tra
dea
ble
com
modity. In
an e
ffic
ient m
arket
the
val
ue
of a
RO
C should
ev
entu
ally
move
to the
diffe
rence
in c
ost b
etw
een c
onven
tional
ener
gy
supply
and ren
ewab
le e
ner
gy supply
.
•Ele
ctrici
ty is trad
ed inte
rnat
ional
ly (fo
r ex
ample
Ire
land-U
K) but as
yet
th
ere
is n
o inte
rnat
ional
RO
C tra
din
g sch
eme.
